Hey American, Ordering a Billion Airplanes Is Good, but There’s a Lot More to Do

After years of back and forth, the Department of Transportation has finally decided to do the right thing and let US Airways trade a host of slots at New York’s La Guardia for a bunch of Delta’s slots at Washington National Airport. This swap is not a simple transaction. There are a lot of logistics behind it, and it took major creativity and commitment from both parties to make something like this work. Hopefully American is taking notice. And I say that not because Delta has made a move that will once again hurt American in New York, but rather because American needs to get off its butt and start doing some bold things like this to fix its business.

After last week’s post on American’s decision to order 460 new airplanes, I had some great offline conversations with people about it. I still stand by my belief that it was a good move. I have no doubt American beat up the manufacturers to get a great deal, and it will certainly help to lower operating costs when the airplanes start coming in, probably at little to no additional cost to American. But that doesn’t mean that American’s problems are solved. If American thinks this is the solution, and I really can’t imagine that’s the case, then the airline is screwed. This doesn’t touch American’s revenue problems at all.

The news that Delta and US Airways received approval of the slot swap provids a great contrast between Delta/US Airways and American. Delta and US Airways have been very proactive at doing the right thing and improving their respective businesses. For US Airways, it’s been all about focusing the business on reliability, convenience, and appearance while re-forming the route network to fit its strengths. US Airways shut down the money-losing Vegas operation. It got rid of all the non-hub flying on the east coast that was a drain. It cleaned up its airplanes, and focused on on time performance. And now, it’s ditched its turboprop-based hub at La Guardia in favor of strengthening its position at Washington’s National Airport where it’s a much stronger player and can draw better revenue.

For Delta, the change has been no less significant. It has pulled down flying at minor hubs like Cincinnati and more recently Memphis. It’s parking smaller airplanes and cutting service to small cities that simply aren’t profitable. The airline built up a more comprehensive premium product and has worked on setting product standards from its 70 seaters on up. It has positioned itself as a technology leader in a variety of ways, and it has worked hard to improve the airport experience. Now, it can trade its Washington position in order to strengthen its already strong capabilities in New York.

For both US Airways and Delta, this is yet another effort to play to their strengths, and it’s going to provide a great deal of benefit to both. Let’s contrast that with American.

Instead of doing hard work on its own, American is relying on partners to fix its problems. It has put its eggs in the joint venture basket – saying that its partnerships with British Airways/Iberia as well as with Japan Air Lines will spike revenues. It’s built up a partnership with JetBlue to feed its flights in New York and Boston. That’s nice, but it doesn’t fix the structural problems. It’s just a patch.

If you didn’t see the investor report issued by Bob McAdoo back in May, then you missed out on a scathing review. Bob noted some very simple things, like the fact that American’s 10 worst routes lose about $450 million a year, more now that oil has spiked. He uses Chicago to London as an example. American gets a much lower fare than United but it flies larger airplanes and has more frequencies. The same goes from JFK to LA and San Francisco. The average fare to LA has dropped over $100 since 2000 but the level of service stays the same, losing money all along the way.

Instead of addressing these big problems, American pokes around the edges. Sure, it made some moves, like slowly killing the San Juan hub, and cutting some vestigial flying, but it’s been mostly minor changes. It stops flying routes like San Francisco to Honolulu and starts flying to Helsinki and calls that a strategy. (This week, it’s building up Ft Lauderdale a little. Woohoo.) It has its cornerstone strategy of focusing on LA, Dallas, Chicago, New York, and Miami. That’s fine. But instead of just culling service around those cities, it seems the problem is how American serves those cities in the first place, at least that’s what the McAdoo report makes very clear. Then there’s New York. Delta has made huge strides in New York, and it will now have a ton of new service from La Guardia to offer up to its corporate clients. American stands still.

It’s not just the route network but the onboard product as well. The most glaring deficiency is that American is the only long haul domestic airline without a plan for flat beds in business class. It rolled out its substandard business class about the time United went fully flat, so it was obsolete from the start, and nothing has changed. Even US Airways has been actively rolling out flat beds.

Even when American has been a leader, it’s quickly fallen behind. It was an early adopter of gogo inflight internet, but it only put it on a limited portion of the fleet. While Delta put it everywhere, American stuttered and is only now catching up. Hopefully some of its more forward-thinking moves, like working on streaming video with gogo will actually go past the testing stage and give the airline a leadership position in . . . something.

I’m sure many of you will say a merger is the answer, but it’s most definitely not. American’s costs are higher than any potential merger partner, so it would effectively kill an airline that works well today on its own. The math becomes 1+1=0.5 if they were to do an ill-advised combo. So the weight falls squarely on American to do the hard work. It has spent a lot of time raising cash, but it keeps losing money while others profit. Instead of slowly bleeding cash, American needs to invest that money into fixing its problems.

The airline might want to take a hint from its partner Qantas, which is about to make some major changes on August 24 in order to get its house in order. Will these be popular? Not all, but that’s not the point. The point is turning the business around at all costs.

31 Responses to Hey American, Ordering a Billion Airplanes Is Good, but There’s a Lot More to Do

Great points, as always. But don’t you think AA staying out of bankruptcy has had something to do with their inability to transform? Delta, US Airways and United were all able to overhaul how they did business in no small part to extended bankruptcy periods. AA’s strategy of changing the moving tires on the bus is much, much more difficult. In part that’s a financial issue, but I think one positive of bankruptcy is that it forces companies to re-think all of their decisions from a higher level. Agreed that AA seems to dabble around the edges, but that’s because a) it’s inherently a conservative organization; and b) public companies don’t like massive shifts. Delta & US (and UA before their merger) were able to make massive changes in how they did business because bankruptcy forced them to re-think their strategies. Ironic that AA, which was praised for not going bankrupt, has long suffered because of that decision.

There’s no doubt in my mind that avoiding bankruptcy has certainly been a disadvantage for American. And that really sucks, because the airline did the right thing. But much of that disadvantage is related to cost issues, I think. It doesn’t really explain their revenue deficiencies. I think another piece of this is that AA hasn’t merged. Everyone else in this industry has had a recent merger, and that gives airlines an opportunity to get infused with new thinking, and it helps them make decisions that need to be made. AA hasn’t felt that pressure.

But still, it doesn’t explain why American doesn’t have flat beds in biz, or why it continues to fly a bunch of large capacity airplanes between the coasts. There is a lot that could be done regardless of whether the airline filed bankruptcy or not.

It was somewhat recent that American merged with TWA. One problem with American “mergers” have been that they pretty much eliminate any shred of the partner airlines rather quickly. I agree with your article. American seems to stand still where everyone else adjusts.

I think when AA was #1 they got it in their heads that what they were doing was right and everyone would follow them. Now that they are #3 they don’t seem to know how to act or what to do.

They will say they have never been in bankruptcy and make it sound like a great thing, but maybe that is not the case. The other majors that have been through it once or twice have all seem to do better and grow, and to look at themselves and do what needs to be done.

AA seems to want to do as they always have, which doesn’t seem to be working. Was there any carrier who tried to start hubs all over the country (not counting buying TWA and getting STL) like AA did in SJC/RDU/BNA and then have to shut them down? They don’t seen to be focusing on their remaining strengths and core routes enough like the other carriers have.

American always was *the* risktaker in this industry. It developed the reservation system. It rolled out the frequent flyer program. It basically invented modern revenue management. It took risks by starting new hubs and seeing if they worked.

American was never the airline to sit around and do nothing back during the Crandall days, but that’s what it’s become.

No different then Southwest. Ol’ Herb kept the airline in check. Made sure the carrier was able to do their famous quick turns at NON congested airports. Adding LGA in recent years/EWR/DCA/BOS..etc..etc…with Airtran cities to come). Kept Labor costs in check. (Currently one of the highest paid in industry) Always maintained a singular fleet (AirTran has Boeing 717) of Boeing 737’s. Barebones service. Now offering snacks and getting Wifi.
Boarding with plastic cards, now Changing the boarding procedures to gates.

To be fair, United (not including Continental) can be viewed in the same way as American on the domestic in-flight side. ie, no wifi (except on the transcon flights). But even here UCH mentioned on it’s quarterly call that they are working on a domestic wide solution for wifi not just UA or CO, which would put AA so much farther behind the big 2.

I am sure another aspect is the slow adoption of larger RJ’s into the network to optimize capacity.

I would have put United into the same category previously, but now with the Continental team in charge, I expect that to change. That being said, United did do some smart things over the last few years. p.s. was one of the smartest moves that airline could make, for example. But I see the old United as effectively dead at this point anyway. (At least, I hope that’s the case.)

Management bonuses really aren’t a financial issue. They’re a drop in the bucket in the scheme of things. The bonuses, however, have been an ill-advised catalyst for the destruction of relations between labor and management. The unions may like to claim it’s a big financial issue, but it’s not – it’s just an issue of fairness and what’s right.

I agree with your point regarding fully flat beds in business, but I don’t see American’s on-board product as significantly behind its competitors on the domestic side. In fact, in some ways, I think AA’s domestic on-board product is a leader: every jet has power outlets (at least in some rows) in coach (some require an adapter, but it’s still power), the interior of the planes has a consistent look (unlike UA, which was all over the place before the merger and is now worse), and the first class product offers (1) consistently more legroom than competitors, (2) more seats than United, (3) and significantly better dining options (fly a UA vs. AA transcon, and the differences are huge).

Good points, CP. I would actually argue that power outlets show a great deal of what’s wrong with American. Yes, American likes to say that it has power outlets on its whole fleet (or will by year-end, I think). But it’s completely inconsistent. On some airplanes, it’s DC power and they don’t provide an adapter. And on most fleets, it’s only in some rows. There doesn’t seem to be much rhyme or reason around which rows have power, so it ends up being luck of the draw for a lot of travelers.

If American wants to go out there and promote how it has power, it’s going to disappoint a lot of travelers because they won’t have it. And even then, how does it promote it? “We have power on most of our fleet*” (*adapter sometimes required, many rows won’t have it). They’ve done sort of a half-assed job. It’s an area where they could have been a leader but instead are just a confused mess.

I agree with the consistency and marketing issues, but I see that as an industry-wide issue on domestic fleets. It would be great if they could resolve it, however — WiFi on every plane, power on every plane, etc. Right now, I see DL as the only airline that’s really attempting to address the consistency issue and, where they haven’t achieved it, going a long way on their website to at least make transparent what services can be expected on a particular aircraft.

What’s AMR’s problem? Is it low revenue? Is it high costs? I’ve read both. And maybe it is both. As an observer, it seems AMR is trying to emulate what US Airways has been doing for quite some time; concentrating flying in areas of strength. It simply hasn’t been nearly as aggressive or decisive about it, despite its protestations to the contrary. I think looking at what US has done and is doing can give some insight into what American can and should do. US Airways management and employess have taken what most considered a nearly dead airline and resurrected it despite the widely criticized seniority mess. So it can be done.

US was too big. It was flying to too many places and had costs that were too high for the revenues it was capable of generating.

AMR is also too big. Even though its network is marginally better than US’s, it can’t generate enough revenue to cover its costs. SOunds familiar, huh? Like the US of the past, AMR needs a fundamental restructuring. If it takes bankruptcy, it takes bankruptcy.

If Bob McAdoo is correct, AMR could cut its way to marginal economic results at least. I haven’t read his whole note, but I’ve read more than one article about it. If US’s example shows anything (and if McAdoo is right), AMR needs to cut capacity. It doesn’t need ten flights a day from JFK to LAX. It doesn’t need all of the fights it operates to LHR. The mantra for every other airline has been to “right size” the airline; to emphasize profitability over market share. They’re mostly profitable. AMR isn’t. Why?

AMR is still living in the 1980s. It needs to deploy its assets where they can produce the most revenue or cut flying that doesn’t contribute to the bottom line. It had to order more modern aircraft. It now has to right size for the 21st century.

AMR’s management needs to forgo its bonuses until the company is profitable; not because it makes much difference to the bottom line, but because of the message it sends. A management has to have at least a small level of employee buy in. And from what I read, AMR has none.

AMR’s unions are worse. They expect wages and benefits to return to 1990s levels with no gains in productivity. Southwest’s people are well paid. But Southwests people are more productive than AMR’s. Costs aren’t merely a function of wages and benefits. They’re a function of what those wages and benefits generate in revenue and positive earnings. I hope it doesn’t take bankruptcy to force the necessary work rules concessions. Maybe AMR should offer buyouts to its older workforce like Delta has. The long term benefits will probably outweigh the short term costs by getting the disgruntled dead wood out of the organization.

I don’t know how much American can do to increase its revenue if it doesn’t get a handle on its capacity and work rules situations. But right sizing and running a better airline has worked for US. That strategy is worth a shot at AMR. But it will take a management who is willing to bite the bullet and labor who wants the airline to succeed instead of standing in its way.

Good stuff, DesertGhost. I think it is both a revenue and a cost problem, as you’ve said. Part of it just seems to be an unwillingness to make changes as needed.

Look at Chicago-London for example. As of now, there is a daylight flight from Chicago on a 767. Then there are three evening flights on 777s. This doesn’t include the two BA flights every day that AA can sell as its own as well. I understand why that’s the case. The 777 is the only airplane with First Class in American’s fleet, so it really doesn’t have another option if it wants to offer First Class. So what could American do? It could create a subfleet of 767s with First Class if it wanted. Or it could create better Business Class product so that First Class wasn’t so important. It could, at the very least, cut out one flight a day.

Then there’s JFK to LA. If First Class is that important then retrofit some older 757s and ditch the 767-200s. My guess is that American could probably do just fine flying a two-cabin airplane these days in an international config. So do like Delta and use 757s in that configuration. Or maybe there’s spare time on 767-300s in JFK. There are ways to fix these problems, but it requires effort and potentially cash.

AA’s new flight to Helsinki actually makes some sense. It’s a joint venture with Finnair so I assume they are also risk-sharing, and together with Finnair’s JFK flight they feed a considerable amount of passengers to Finnair’s Eastern European operation.

Not to be off topic here but doesn’t this slot swap also open up new slots at DCA for others (Bg, W, VX, etc) not to mention all the mergers happening opening more slots and gates at these restricted airports. I think it’s a great thing.

Now to stay ON TOPIC. I think this is a cycle business. Everything happens in cycles. We had an age once with big airlines ruled because it was regulated. So we only had giants to choose from. DELTA was the small fish.

Then dereg happened and many small airlines started popping up (Southwest, Frontier, Spirit).

It wasn’t too long ago EOS and other tried to follow suit. But AA was the big kid. Now AA is #3, #2 is DELTA, and #1 is United.

But mergers are happening and things will get to messy first. So we’ll have new guys always coming in and out and mergers and divestures happening. AA will break from AE. If AE can survive I wouldn’t be surprised if 10 years down the road AA tries to gobble them up again or some other big guy.

Main point because I just realized I’m all over the place. AA will be #1 again at some point. It’s all in timing.

Yes, there will be 16 new roundtrip flights given to new entrants at La Guardia and 8 at National. These have to be sold to airlines with limited or no service at the airport already, so it will open up opportunities.

AA should outfit the next 15 737-800’s for new Flagship service from JFK to LAX and SFO ala United P.S. It could be figured with 12 First class lie flat seats, 24 domestic First class seats and 96 economy seats for a total 132, a reduction of 36 seats per flight over the 767-200ER with 168 seats. For LAX, it would be like taking out two 762 flights and one for SFO but with the same frequency.

Instead of a money losing flight to Delhi, AA should move those planes to LAX for another Asia flight, Guangzhou or Hong Kong have been mentioned.

Also from ORD, one of those LHR flights should move to LAX where they only have one daily flight now. They should do the same from some of those BOS flights and switch one to MIA.

I see this US Airways/Delta Air Lines slot swap as a missed opportunity for AA. They should have come up with a counter offer, maybe by dropping their DCA-BNA, RDU and STL service and giving US the slots, thrown in one or two LHR slots, some Brazil frequency would be no problem, and cash would have been a compelling offer. Maybe a codeshare or even an offer to join Oneworld might have piqued US’s interest too.

Bob McAdoo is right. AA has some of the best hubs in the best cities but those boneheaded decisions (not even talking about bankruptcy) are dragging them into oblivion.

Good idea, though based on my back-of-the-envelope math, only 8 or 9 rows of 31″ economy would fit on a 737-800 (i.e., 48-54 seats) based on your proposal (assuming 60″ lie flat seats and 40″ domestic first seats).

Qantas has said it’s going to roll out its big plan on August 24 for fixing itself. Lots of expectations about axing several long haul routes and a further transfer to Jetstar. I’m not necessarily saying that AA should mimic Qantas, but it should look at doing something dramatic.

I try hard to avoid American now. It just seems like their coach seats aren’t as comfortable as others. I don’t know if Seatguru is right, but I was on USAir’s A320 this week, and the 31″ of pitch (if true) seemed roomier than AA’s 738 31″ of pitch.

Cranky, I’m wondering if you have any opinion on AA’s aggressiveness with “direct connect” and the negotiations with the GDS vendors. Any thoughts on how that stance (which seems industry-leading, in that as far as I can tell the other airlines agree with AA but are happy to let them take the heat) plays into your thoughts on AA’s overall sloth-like behavior on the revenue front? Just curious.

Glad you brought that up. I like AA’s aggressive behavior in this area a lot, and that is a good example of something that they are doing to lead. But so far, this is only a cost issue. Yes, in the long run they want to be able to sell more ancillary products in a better way, but they’re a long way from making that happen. (Priceline uses direct connect and it looks no different than any other site.) So that’s more of a long term project. There is a lot they need to do in the short run to get their house in order.

AMerikan Airlines may update their feet and save some money on gas, but if they don’t do something to improve their Customer S E R V I C E, they will crash and burn into bankruptsy. They simply don’t give a ([fill-in] rhymes with twit) and it shows – on the web, on the phone, at check-in and on the airplane. Fare-paying PAX seem to be a serious annoyance to AA, a major inconvenience to their commuting staff and a disturbance to their ‘normal’ operations. Four hundred plus new airplanes is a bold move, but is seems like the wrong move for this sorry legacy carrier. Sorry, but I just don’t like them! -C.